Bernanke is turning the US into Japan economically speaking. Instead of taking the banks down the route of Iceland and recovering quickly he has chosen the path of Japan and its slow demise.

There’s a problem with kicking the can down the road – Ben Bernanke, (December 12 2012)

I’ve taken this quote out of context — Bernanke was actually talking about the fiscal cliff, and not monetary policy. But kicking the can down the road is exactly what Bernanke is doing in his domain.

Instead of letting the shadow banking bubble burst and liquidate in 2008, Bernanke has allowed it to slowly deflate, all the while pumping up the traditional banking sector with heavy, heavy liquidity:

The Fed continues to fight a losing battle, in which it has no choice but to offset any ongoing deleveraging – be it through maturities, prepays, or counterparty failure, or just simple lack of demand for shadow funding conduits – in the shadow banking system.

Trillions and trillions of liquidity later, Bernanke is barely keeping the system afloat:

The reduction in shadow liabilities remains a massive deflationary and depressionary force (and probably the main reason why a tripling of the monetary base has not resulted in very severe inflation). We could have taken the pain in one go back in 2008 — let the failed banks and failed sectors fail, let the junk be written down, and let all efforts go toward rebuilding a more robust system less sensitive to counterparty risk. But we chose to kick the can down the road, and try to reinflate the biggest bubble in history through helicopter drops to the financial sector, the outcome of which has been booming incomes for the rich, and a total lack of growth and opportunity for the poor (except, perhaps for the dubious “opportunity” to join the masses of the long-term unemployment and claim a slice of the increasingly unsustainable welfare pie).

The Bundesbank massively cut its growth forecasts for 2013 for the German economy from previous estimate of 1.6% down to 0.4%. Such a huge drop in growth forecast shows even the mighty German economy which has benefited from a weak euro is now feeling the pressure. Its the last thing Merkel needs as she faces an election next year with a weakened economy and a growing bill for bailing out the rest of Europe. Couple that with the TARGET2 imbalance and a strong possibility of Italy or Spain needing a bailout, she could be facing an angry electorate.

The German economy could slam into reverse this winter as the crisis in the eurozone intensifies, the country’s central bank warned yesterday.

The Bundesbank slashed its growth forecasts in an abrupt reversal for Europe’s powerhouse economy. It now expects Germany to grow by 0.7 per cent this year and just 0.4 per cent next year.

It was previously expecting growth of 1 per cent in 2012 and 1.6 per cent in 2013.

But the Bundesbank added that there was a risk of recession – defined as two quarters of contraction in a row – this winter. ‘There are indications that economic activity may fall in the final quarter of 2012 and the first quarter of 2013,’ it said. Germany has been the key driver of an otherwise moribund eurozone.

Experts warned the country’s slump is ‘a big reality check’ and casts doubt over the future of the single currency. Any setback in the eurozone, Britain’s major trading partner, raises the risk of a new recession here. The Bundesbank blamed the crisis crippling the eurozone for the downturn amid signs that German patience with struggling economies such as Greece and Spain is wearing thin. ‘Germany cannot prosper alone,’ it said. ‘It has a particular interest in the welfare of its partners.’

The gloomy analysis came a day after the European Central Bank warned that the 17-nation eurozone will remain mired in recession until late next year. ECB president Mario Draghi said a ‘gradual recovery’ will not start until ‘later in 2013’ as the region lurches from one crisis to the next. The eurozone sank back into recession over the summer as the malaise in peripheral states spread to Germany and France.

The German government put on a brave face in response to the Bundesbank forecast. A spokesman for Chancellor Angela Merkel said: ‘The government is cautiously optimistic that we’ll keep growing.’

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Germany was quite happy to watch the struggles of the PIIGS and benefited from the weaker euro but it now looks as if the weak state of the Global economy is beginning to take its toll now on Germany.

Last year, German exports rode to a new record, jobs were being created in massive numbers, real wages rose, housing and real estate boomed, the federal budget was nearly balanced, and consumers felt good and spent money. There were moments in 2012 that made people dream of a repeat performance—despite the havoc that the Eurozone debt crisis has been wreaking.

Whatever was happening, Germany would be able to make up for declining exports to the Eurozone with strong exports to Asia and the US. Internal demand would remain solid. And this illusion of durable economic strength and fiscal virtue has tainted the discussion about saving the euro, bailing out debt-sinner countries in return for austerity measures, and keeping the European Central Bank in check.

But now the crisis has moved from Germany’s front yard to its doorstep and is about to enter its living room. Beer sales, for example. That the German Federal Statistical Office tracks them shows just how crucial a staple beer is. Alas, beer sales to customers in Germany dropped 2.3% in the first half over the same period last year, and ominously, exports dropped 2.9% [for the worldwide beer phenomenon, beer consumption per capita, and where the growth really is, read…. Beer, A Reflection Of The World Economy?]

Auto sales got clobbered in July, dropping by 5% from July last year, and by 16.5% from June, knocking year-to-date sales, which had been holding up well, into the red (-0.1%). Auto sales have been a fiasco in the Eurozone for a while. In Greece, where they’d been plummeting for years, they plummeted again in the first half, by 41.3%! In Italy, by 19.7%, in France by 14.4%, in Belgium by 12.7%. But until July, Germany had been spared. No more. Of the big brands, only Audi (Volkswagen) was up (+14.3%). The others got hammered: Opel (GM) -18.6%, BMW, Mini -17.9 %, Mercedes -14.6 %, and Ford -4.4%. Even VW, market-share leader and on a phenomenal worldwide roll, was down 1.5%.

Retail sales, which had also been doing very well, stalled. And the closely watched Ifo index for July deteriorated so sharply that Hans-Werner Sinn, President of the Ifo Institute, admitted, “The euro crisis is having an increasingly negative impact on the German economy.”

Germany’s manufacturing industry is now in a rout. Output and new orders dove in July at a rate not seen since April 2009, the depth of the great recession. It was the 4th month in a row of lower production volumes, and the 13th months in a row (!) of declining new orders—a terror for future production. The overall PMI index crashed to the lowest level since June 2009. Exports were hardest hit, particularly to Western Europe, Asia, and the US, the three largest markets in the world! The decline in exports was steepest since May 2009. And there is talk of “job shedding.”

These trends are reminiscent of the financial crisis when export orders fell off a cliff, causing GDP to plunge 2.1% in the fourth quarter of 2008 and 3.8% in the first quarter of 2009. Annualized, those two quarters amounted to a horrid double-digit decline in GDP—the worst two quarters in the history of the Federal Republic. The German economy lives and dies by its exports.

Yet my contacts in Germany remain “relaxed.” There’s no malaise or panic. “In the countryside, everything goes on regardless,” wrote one of them. Restaurants are doing well. People have jobs, wages are going up. Inflation has backed off. The recent feeling of optimism, after years of pessimism, is still hanging in the air. People are bidding up rental properties and plowing their savings into brick and mortar. Well-educated Greeks and Spaniards are heading to Germany in search of work. For them, it’s nirvana. The German government, through various organizations, is trying to rope in its expats in Silicon Valley and lure them back with special incentives to fill the shortage of qualified talent at home. Clearly, the numbers I mentioned haven’t yet made their way into the perception of day-to-day reality.

The public debate about bailing out Spain or Greece, and about Draghi’s plan to go on a bond-buying binge, is taking place to the backdrop of a sweetly humming economy. But the ear-piercing screech of the German export machinery as it shifts gears will change the debate—and the political will. German exporters, a super-powerful lobby, will push for all-out “do-whatever-it-takes” flooding of the Eurozone with money. On the other hand, if prospects of layoffs or forced part-time work (Kurzarbeit) are hounding consumers, their appetite for bailing out southern countries will fade altogether—and so will Germany’s ability to do so.

Argentina, an alternative path for indebted Eurozone countries? Not so fast! Since late July, a new set of words has been showing up in articles about the economy. Shrinks. Slows. Stagflation. These chilling terms describe the consequences of what some nasty economic indicators have in store. Read…. Argentina: The Big Shrink, by Bianca Fernet.

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While the focus over the last week has been on the downgrade of France and subsequently other european countries, the UK continues to slip under the radar. The 20% fall in GDP between 2007 and 2010 was $562bn which is over two and half times the entire eurozone. Funny how now of this gets any media attention. In a post a few days ago was a chart overviewing UK’s debt.

Some of the headline stories coming out of Britian are starkling.

Almost one million Britons have taken out an emergency ‘payday’ loan to help pay their rent or mortgage in the last year, according to Shelter, the housing charity.

………

Around six million households would be unable to survive for more than five days if they stopped being paid, such are the low levels of savings among Britons, new research shows.

According to rough calculations on The Automatic Earth blog:

If we put the average household size at 2.5 people, that means that, out of 60 million living in Britain, 2.5 million are on the verge of losing their homes, and 15 million, or 25% of the population, risk having to cut on their basic needs, food and heating, if they hit even the slightest speedbump.

John Ross, Visiting Professor at Antai College of Economics and Management at Jiao Tong University in Shanghai writes a real stunner on his blog Key Trends in Globalisation:

The magnitude of the blow suffered by the UK economy since the beginning of the financial crisis is very considerably minimized by not presenting it in terms of a common international yardstick. Gauged by decline in GDP, using a common international purchasing measure, dollars, no other economy in the world has shrunk even remotely as much as the UK.

Only Iceland faired worse, but at least they are over their troubles.

Expressed in percentage terms the situation is no better. Of all economies for which World Bank data is available only Iceland, with a decline in dollar GDP of 38.4%, suffered a worst percentage fall than the UK – even bail out economy Ireland, with a fall of 18.4%, outperformed the UK economy.

Already its tried, austerity and QE which haven’t worked. The figures keep getting worse and the presstitutes keep ignoring the story.